The evolution of the shareholder-board relationship

It is owners who appoint boards, at least in corporate theory. Owners can nominate people for director roles, as can boards. Owners vote on directors' appointments and owners set directors' pay.

But before 2003 boards could and did set their own pay without reference to shareholders. They frustrated any proposed appointment by shareholders. Further, but this will keep for later, they frustrated the shareholders' vote by rigging the meeting and their votes by playing with the venues of meetings, meeting dates and proxy voting.

As if it was not already hard enough to get a shareholder director appointed or get a useless director removed, they further gamed the system and got away with it.

By the way this is a global phenomena and New Zealand is remarkably more open and honest than the USA or Europe, or even Australia, where corporate games are far more prevalent.

There are three sets of rules around this interface, the Companies Act 1993, an individual company's particular constitution and the Listing Rules if a company is listed. In some instances the Companies Act is more restrictive and at other times the Listing Rules are.

The Companies Act permits all shareholders to vote on all matters regardless of any conflicts of interest, and in some instances has a high threshold for the passing of a resolution, for example 75%. The Companies Act treats each company as a separate legal entity and disregards groups, a major flaw in the Companies Act which needs fixing.

We have been lobbing successive ministers for eight years on this. Labour saw the sense clearly and agreed to put it on the agenda for the next Companies Act fix, but forgot. This said they did strengthen minority buy out rights, another thing we have been lobbying on for years.

The Listing Rules, on the other hand, prohibit interested parties from voting on matters of self interest and look at companies as whole groups and have a low threshold of 50% for all matters. This is why sometimes a company ballot paper will have the same resolution twice, once under the Listing Rules and once under the Companies Act. Stupid really and further confusion which assists management to game the ballot paper for their own ends.

Let us start with directors' fees. Prior to 2003 shareholders thought if the shareholders of the listed company approved fees of $500k pa that was the most that would be paid to directors. Not so.

Firstly directors were habitually authorised in the companies' constitutions and by the Listing Rules to pay retirement allowances of up to 3 years fees upon the retirement of a director. Secondly the shareholder resolution only applied to the parent company fees not fees paid by the subsidiaries as it was the shareholder of those subsidiaries who would set the fees for the directors of those subsidiaries.

Now think about this for a moment. Who are the shareholders of a subsidiary company? The parent company of course. Who exercises the rights of owners in the case of one company being owned by another? The authorised agent of the shareholder company of course. And who do you think that might be? The directors of the parent company of course. So in essence boards could pay themselves whatever they liked. The Listing Rules were a bit vague on this practise but the Companies Act permits it, as the word "company" is defined to be just the company not the group.

Did this bad treatment of shareholders occur in NZ? You bet it did. In my opinion, the most outrageous gaming by the most reprehensible group I have encountered occurred at Tower. It only came to light because when the CEO post float was dumped and the enormity of the shareholder loss became known, the annual general meeting (AGM) turned into a mess. This was about the time Guinness Peat Group first bought into Tower.

It was really obvious that something was wrong. The accounts showed that the directors were paid more than the limit approved by shareholders, so further inquiry was required.

So the Shareholders' Association eventually ascertained that the board of the parent company was approving directors' fees for themselves in subsidiaries without reference to shareholders. Worse, that this was checked by the company lawyers who confirmed it was all perfectly legal and complied with the Companies Act and the Listing Rules. Worse still, Tower was daisy chaining appointments through the subsidiaries and claiming retirement allowances as well.

For example, director A gets appointed to Subsidiary B, retires from Subsidiary B, gets paid retirement allowances while being appointed to Subsidiary C. Retirement allowances are repugnant. But what did this lot not understand about the meaning of the word "retirement"?

I got really upset with this board by describing them as the worst bunch of pigs I had ever had the pleasure to witness. By the way they still, as a group, take the prize as the worst swillers of shareholder milk I have ever witnessed. Even Contact Energy is benign compared to these guys and gals. Suzie Staley at the tea and biscuits said I had got it wrong. They were really hard working people who did extra work in the subsidiaries and deserved it. I said: "Maybe you are right, but it is the shareholders' who reward directors and that is the entire point."

"Just because you work hard is not an excuse to be a thief." She asserted that it was perfectly legal, so I explained to her the difference between legality and morality, something at the time lost on her. This said, in the case of Tower at that time their collective work was utterly misguided and totally ineffective so a debate on pay, legal or moral, was meaningless. None of them should have been paid at all.

So what I and the Shareholders' Association did, was complain to NZX that the rules had been breached. In my view a clear reading of the rules and in particular the definition of a company for the purposes of the Listing Rules made it clear this issue should be treated on a group wide basis. Bill Falconer at the time was responsible for regulation. We won the argument against every law firm in NZ who had a contrary view and were happily rubber stamping what I viewed as the theft of shareholder funds.

Falconer told me the practise was mildly widespread, that the common view of lawyers was that it was okay, that companies relied on the advice of lawyers and in the circumstances NZX was not going to demand the directors pay back any money at all.

I wanted blood, I wanted them to pay the cash back and I wanted them bankrupeted as a matter of principle.

Despite my harpooning of Bill at AGMs from time to time, and despite the fact I think he has made some appalling decisions at Hellaby Holdings over the last 5 years, I do admire him immensely. He has some wonderful one liners, he is open and honest, and if he thinks he is right he will rigorously debate. But he is more than capable of seeing an alterative view and eventually if that view is fundamentally right, he eventually adopts it.

Bill said to me: "Just take your win Bruce. Leave the money out of it. You have changed the market and this will not happen again. Focus on fixing the system, don't punish the misguided people." And he was right.

They had been humiliated beyond money. To these people money matters but is just writing a cheque. Reputation when taken from them is permanent. Bill was right so I took the win, changed the way board's rewarded themselves and moved on. Most of those involved are now out of public life.

Before 2005 if you wanted to nominate yourself or someone else to the board, you had to do so within (I think) 60 days of the AGM. The AGM was summoned by the board and they determined when the AGM would be and only had to provide 28 days notice of the AGM date. Do the maths. If you nominated someone that they really didn't want and, worse, thought might result in a controversial debate, they just moved the AGM date and told you. Sorry you were out of time and the nomination was thus late.

Did this really happen? You bet it did. When Tony Gibbs sought appointment to Tower's board, Tower pulled this stunt. I met with Colin Beyer, the then chairman, who fell on his sword shortly after. We talked about all the issues outlined in this article and other issues relating to Tower. Eventually he accepted Tony's nomination and eventually the board embraced it and the rest is history.

Tony, always the pragmatist, told me if they played this game he would call an extraordinary general meeting and sack the lot of them. Another underlining of the power of the dominant shareholder.

I have had the moving of the AGM trick pulled by other companies as well.

Anyway that too has been fixed with the Shareholders' Association and others managing to get the Listing Rules changed to ensure companies had to announce when board nominations were open and when they would close with an appropriate notice and time period.

Now the game is fair and we have seen more shareholder sponsored nominations in the last 2 years than ever before in NZ history. The market can thank the Shareholders' Association for that too.

So to recap. Shareholders now set the total remuneration of directors, we have also had retirement allowances removed entirely from the landscape and the nomination process is transparent. These are huge wins for shareholder rights. The first the Shareholders' Association can claim sole credit for, the second substantial credit, and the final one substantial participation credit.

Finally readers I ask you again to join the Shareholders' Association. The ability to get reforms from politicians is a function of numbers. I still need Commerce Minister Simon Power to get the story that NZX needs to lose its role in regulation entirely and that the Institute of Chartered Accountants needs to lose the role of audit monitoring entirely.

Power needs to get the story that one regulator is needed not four. He needs to get the story that litigation funding needs to be made easy (it is currently still illegal). He needs to finish cleaning up the Companies Act to ensure that it also prohibits self interest transactions for all but mum and dad companies, defines companies to include groups, further streamlines minority buy out rights and simplifies the Securities Act allowing further exemptions and simplifies prospectuses.

Just as boards and major shareholders get sick of freeloading shareholders, there is only so far the Shareholders' Association can go if it is carrying a heavy weight of freeloaders. Our opposition wrongly says if shareholders have not joined our membership they must therefore not agree with us. So 1100 do agree and they say 50,000 don't. Thus our ability to get things done is compromised. This of course is woolly thinking as I will explain when I get to proxy voting.

Join now, in the words of Lord Kitchener....." your Country Needs you" and believe it or not it is urgent.

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How exactly does one go about becoming a director of a publicly listed company? Preferably a company with an amoral board.

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